Sterling secured a fractional gain ahead of Friday’ employment report, but the Pound to Dollar (GBP/USD) exchange rate was unable to regain 1.2650 and dipped below 1.2600 after the US data with lows below 1.2580.
A stronger-than-expected US employment report triggered fresh doubts that the Federal Reserve could cut rates in June which boosted the dollar and the US currency is likely to maintain a firm tone in the short term.
Overall risk appetite was also more fragile following overnight Wall Street losses which also hampered the Pound.
According to the Bureau of Labor Statistics, US non-farm payrolls increased 303,000 for March compared with consensus forecasts of an increase around 210,000 while there was only a slight downward February revision to 270,000 from 275,000 reported previously.
Manufacturing jobs were unchanged while there was a small decline in temporary help.
In contrast, there was a strong increase in government payrolls of 71,000 for the month.
According to the household survey, there was a strong increase in the number of employed of close to 500,000 while the unemployment rate edged lower to 3.8% from 3.9%.
Average hourly earnings increased 0.3% for the month with a 4.1% year-on-year increase from 4.3% previously with both metrics matching market expectations.
The data overall suggested that the labour market remained strong which will tend to discourage the Federal Reserve from sanctioning an early cut in interest rates.
Following the data, market expectations of a June rate cut dipped to just below 55% from 65% ahead of the data.
Peter Cardillo, chief Market Economist at Spartan Capital commented; “The real nitty gritty is what happens to hourly wages, which were basically in line with expectations, just slightly over 4%, on a year-to-year basis.”
He added; “That means that while the fear of a further increase in overall inflation may diminish somewhat, nevertheless it’s a strong number. This means June rate cut is now looking less likely, and the dilemma for the Fed continues.”
According to Credit Agricole; “we think that US rates and yields could hold onto their recent gains in the wake of the data. We further note that the USD is trading at a discount vs measures of its broad rate appeal across G10. We subsequently think that the USD remains a buy on dips especially vs currencies like the EUR and GBP.”
Markets will be monitoring risk conditions closely, especially after the overnight slide on Wall Street and fresh 5-month highs for oil prices.
MUFG commented; “Fears over the risk of a broadening out of the conflict in the Middle East have been heightened this week after Iran vowed to take revenge on Israel who it blamed for a deadly airstrike on its embassy in Syria.”
Overall, MUFG still expects that inflation data will be crucial and added; “it is more likely that next week’s releases of the latest US CPI and PPI reports for March will be more important for Fed rate cut expectations and US dollar direction through the rest of this month.”
HSBC also noted the market risk profile; “A strong beat above consensus could spill over into ‘risk’ currencies. Inflation data next week will of course also be instrumental –probably more so – because the risk-on view needs to see evidence of declining inflation amid recovering growth.”
According to ING; “The very high sensitivity of the dollar and the FX market to US data is unlikely to fade.”
Bank of America still expects that the dollar will come under pressure. It added; “Despite US resilience so far, we still assume that the US economy will start slowing this year, consistent with our economists’ forecasts.”
As far as the UK is concerned, the UK construction PMI index edged higher to 50.2 for March from 49.7 previously and the strongest reading since August 2023.
